What happens if you can't pay your credit card UK?

The Token Payment Method is divided into eight easy-to-follow steps. We appreciate that this may be new to you, so make sure you read every step carefully and then reread it! This is going to be your new best friend.

Before we jump in, it’s important to explain that all of the information provided is based on section 7.3 of the FCA Handbook. Also, note that the information below applies to unsecured debts regulated by the Consumer Credit Act 1974.

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What are Token Payments?

A Token Payment is simply the amount you can afford to pay when you can no longer meet the payment terms of your agreement with a creditor.

Who Can Use Token Payments?

The information below applies to unsecured debts regulated by the Consumer Credit Act 1974. So if your debt falls under this category you can use Token Payments.

Step 1. Separate Your Bank Account

Before informing your creditors about your financial difficulty, transfer your income to a bank account not associated with your debts. What do we mean by this?

It’s not as complicated as it sounds. In fact, it's a straightforward process. All you need to do is set up a bank account with a bank with which you have no unsecured debts

No loans, credit cards, store cards, overdrafts. Nothing. This bank account should be brand spanking new. You mustn’t set up or request credit facilities with this new bank. This new bank account is your fresh start.

Step 2. Transfer Income and Payments

Once your new bank account is up and running, there’s a little bit of work to be done, such as transferring all activity to your new account. First, ensure all your income is paid into your new bank account. No more income should be paid into the bank account where you have debts.

Next, manually transfer any direct debits, standing orders, or regular payments, such as your mobile phone contract payment, to your new bank account. It will take some time but do not use the “switch bank” service. Use this as an opportunity to make yourself aware of what payments you have going in and coming out.

By taking these steps, you are not just transferring your financial activities but also taking control of your financial life. We want you to feel empowered and in control every step of the way.

Step 3. Contact Your Creditors (In Writing!)

When contacting your creditors about your financial difficulties, always KEEP ALL CORRESPONDENCE IN WRITING.

Do not use phone calls to communicate with the creditors. If you can find an email address, great; if not, get your pen out or jump onto your computer and write. You should be able to find the postal addresses of most, if not all, creditors on any letters or statements they have sent you. If not, you will need to search for them on their website.

You may receive letters asking you to call the creditor or system-generated letters. If this happens, look for the sender's address on the letter you receive and resend your original letter to this address. Repeat this process whenever you receive correspondence that doesn’t answer your letter. Don’t panic if you haven’t received a response to your letter; it can take time for your email or letter to reach the correct department.

In step five, we’ll explain what to do if and when you receive a response.

Step 4. Calculate Your Token Payment

This is the most crucial part of the Token Payment Method.

If you have reached a point financially where you can no longer meet the payment terms of your agreement with a creditor, you should still try to pay something.

A Token Payment is simply the amount you can afford to pay.

Below is an example of this.

Here’s why this is so important:

The FCA’s Consumer Credit Sourcebook (CONC 7.3) requires firms to treat customers in or approaching arrears with forbearance and due consideration. This includes examples such as allowing more time to pay or reducing interest and charges. FCA rules and guidance also indicate that token or very low payments may be appropriate where someone is struggling financially and cannot meet essential living costs.

Creditors are expected to follow this guidance when a person makes them aware that they are experiencing financial difficulty and is making efforts to put a plan in place to address the situation with the creditor.

Making affordable token payments and keeping your creditor informed can reduce the likelihood of further action, as firms are expected to treat customers in financial difficulty with forbearance. However, creditors may still take legal action depending on the circumstances.

This is why the token payments are so important.

Step 5. Respond to Creditor Correspondence

When you eventually receive a response to your letter, the creditors might ask you to call to discuss your situation. Do not call. Write in your letters that you "wish to keep all communication in writing". Doing this will give you a clear record of all discussions and agreements.

At some point, you may receive a letter that includes an income and expenditure form. It is entirely up to you whether you would like to complete this form; however, we suggest you do so, so that your creditor can consider freezing the interest and other charges.

There is no requirement under the FCA’s Consumer Credit Sourcebook (CONC 7.3) to complete a specific form, but providing information about your financial situation can help creditors understand your circumstances and consider appropriate support. The form is simply the creditor’s way of assessing what you can afford to pay, so be mindful of this.

If you decide to complete the income and expenditure form, you can use our budget planner instead of the one provided by the creditor or debt collector. Please read the following section carefully.

Step 6. Completing an Income and Expenditure Form

As mentioned earlier, the income and expenditure form is a crucial tool for the creditor to understand your financial situation and determine a feasible repayment plan. If you choose to complete the income and expenditure form, here are some essential pointers to be aware of:

• Only complete the parts you are comfortable with. If you are unsure about any of the requested information, do not feel pressured to complete that part of the form.
  
• The creditor is looking for the figure remaining after subtracting your expenditure from your income. This is the figure they will expect you to pay.
  
• Creditors may suggest payment amounts based on the information you provide, but the key point is that any payment should be affordable for you. Your income and expenditure form shows the creditor how much you can afford to pay each month.
  
• Remember, you are not required to disclose sensitive information such as wage slips, bank statements, or medical records. Your privacy is important and should be respected.
  
• Be aware that luxury expenditures, such as expensive gym memberships, alcohol, cigarettes, etc., may be questioned.

Once you have completed the income and expenditure, retain a copy and post the original to the creditor.

Step 7. Confirming Your Token Payment Plan

You will usually receive a response, which may confirm your offer or propose an alternative arrangement based on your affordability. After that, you will be contacted again for a review.

Step 8. Reviewing Your Token Payment Plan

The creditor will get in touch to review your plan at least once within 12 months. However, this will vary; some may review your plan after a month, some after three months, and some after six months. When you receive a letter asking for a review, don't feel pressured to increase your payment if you can't. If your circumstances haven’t improved, you only need to write back to the creditor telling them this. If you can afford to and want to increase your payments, you can do so anytime.

Only pay what you can afford; never sacrifice your mental well-being to increase your debt payments.

Although the Token Payment Method has just eight steps, it contains a lot of information, with do’s and don’ts at every turn. We don’t want the Token Payment Method to be daunting; we want you to feel calm and in control, ready to handle your unsecured debt at a pace you can manage.

You’re bound to have questions! We’ve highlighted some key questions you might have below…

How Long Can I Make Token Payments?

There is no fixed legal time limit, but token or reduced payments are usually reviewed periodically and should reflect your current financial situation. If that sounds surprising, it’s worth looking at how the FCA describes this.

Token Payments are based on what you can afford. It’s as simple as that. If you are still experiencing financial difficulty and you’re paying what you can afford, continue to pay the token payments. There is no time limit on how long a person can experience financial difficulty.

However, as a reminder, creditors and debt collectors will likely contact you about your payment plan at least once every 12 months to see if it is still affordable. You may also find they send you another income and expenditure to complete.

If your circumstances haven’t improved, you only need to let the creditor or debt collector know and state that you want to stay in the current plan.

It's essential to know that your debt can still be sold anytime, even while making token payments. If your debt is sold, please read our “8 Steps to Handle Debt with a Debt Collector Using the Token Payment Method" guide and consider that you may need to restart this process with them.

Will Token Payments Affect My Assets?

This is one of the most significant benefits of the Token Payment Method!

In most cases, your assets are not directly affected when dealing with unsecured debts, especially when you are communicating with creditors and making affordable payments. Creditors and debt collectors must treat a customer (the debtor) with forbearance if a customer provides evidence of financial difficulty, openly communicates and makes token payments.

We believe your unsecured debts should never come to voluntary bankruptcy or enter into agreements that put your assets at severe risk when you are actively making payments as agreed by the creditor in line with the steps we have outlined.

What Happens to My Credit Rating?

Ultimately, your credit rating will be affected, and the marks will remain on your credit file for six years. However, the impact is much less than that of a Debt Relief Order, Individual Voluntary Arrangement, or Bankruptcy.

If you use the Token Payment Method, you won’t be making the minimum monthly payments, therefore breaching the terms of your agreement.

So, what are the repercussions? The creditor will try to get you to rectify the breach by finding a solution so you can get back on track. They’ll do this by encouraging you to clear any arrears or changing the agreement terms so that you are no longer in breach.

If they have no luck, after a while, they will announce that the agreement has been broken. This is called a default. This means you will be defaulted even if a token payment agreement is in place.

It’s important to note that, in many cases, this leads to arrears and default markers on your credit file rather than immediate escalation, but creditors still have the option to take further action depending on the circumstances. Why? FCA rules require creditors to treat customers in financial difficulty with forbearance, which may include reducing or delaying further recovery action where appropriate. This provides a level of security and limits their actions.

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.